As 2013 draws to a close, players in the global oil markets must be reflecting on their fortunes in a year that has been much better than expected. With oil demand rising modestly and supplies plentiful, producers must be fortunate to get the oil prices they have.
Although oil prices were often volatile and seasonal swings most pronounced, the year ended with the price of the Opec basket of crude oil at almost $109 a barrel and the average for the year close to $106. But the price of the basket, which was almost $115 a barrel in the first quarter of the year, declined to $96 in the second quarter before it started its recovery in the second-half.
Other marker crudes followed suit where Brent and WTI averages for the year were $108 and $97.98 a barrel respectively. Prices were driven mostly by geopolitical factors which caused — and are still causing — supply disruptions here and there. Sanctions on Iran are keeping one million barrels a day (mbd) out of the market; most of Libyan production is out due to turmoil and strikes; Syrian production hardly exists; Nigerian oil is affected by acts of theft and violence and the list is now topped by the civil war in South Sudan.
These are countered by increases in North America and Iraq. Therefore, non-Opec and Opec NGL supplies increased by 1.35 mbd, in which North America contributed 1.25 mbd. At the same time reduced refinery throughput at times of maintenance and low margins also pressured prices.
Modest growth in demand
On the demand side, growth was indeed modest. According to Opec, it was 0.9 mbd even though demand declined by 0.55 mbd in the OECD region. However, the International Energy Agency (IEA) has different estimates, with demand growth set at 1.2 mbd and the OECD decline was a marginal 0.05 mbd. At this time of the year, the two organisations’ estimates should converge especially as they use more or less the same background statistics.
The two organisations should resolve these stark differences especially as the supply side estimates are close. Mind you, before the latest revision by IEA, the estimates were closer.
Oil demand was driven by improved macroeconomic indicators in industrial countries, especially with better manufacturing activity in the US and elsewhere in addition to continued growth in the developing countries as China and India especially continue their forward strides.
As a result, Opec’s crude oil production averaged 29.9 mbd in 2013 after it fell in the last few months from a peak production of 30.6 mbd in May. Opec production is also lower from that of 2012 by 0.6 mbd.
What about 2014? It looks like the same factors driving supply and demand balances will continue to do so in 2014 but with a lot of uncertainties.
The question must be asked whether the next six-month negotiations with Iran over its nuclear aspirations will end up positively and Iran can resume its exports in full. The Libyan authorities are saying that exports form its eastern terminals will resume but this remains to be seen.
A ceasefire is announced in South Sudan, but will it last? Will Iraqi production increase sharply as the government is saying or will the deterioration of security on the ground prevent that?
Everybody seems to be certain that the US shale production will continue its increase. Given all these questions, both Opec and IEA forecast non-Opec supplies to increase in 2014 over those of 2013 by 1.2 and 1.9 mbd respectively. The majority of the growth is from North America.
On the demand side, there are signs of continued economic recovery in the industrial as well as in the developing countries. Global growth may reach 3.5 per cent as compared to 2.9 per cent in 2013. As a result, oil demand is expected at just over one mbd by Opec and 1.2 mbd by IEA. The differences in forecasts at this time of the year are understandable and it should narrow over time.
Considering these, the call on Opec oil in 2014 is likely to be less than that of 2013 by 0.3 mbd and could be at the level of 29.6 mbd. This is why Opec at its last ministerial conference early in December 2013 kept production ceiling unchanged at 30 mbd.
All of us following the oil market are used to its ups and downs. But let us hope 2014 will bring more stability and peace around the world.
— The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.